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Thursday, March 25, 2010

Buybacks With Bite

Companies will often announce share buybacks, and then proceed not to execute the repurchases for years, much to the chagrin of shareholders looking for catalysts. Other companies will announce buybacks that are so small relative to the shares outstanding that one wonders if the effort is even worth the transaction costs. But companies that announce large buybacks and then promptly follow through with them send a signal that management means business when it comes to returning money to shareholders.

Consider GameStop (GME), which in January of this year announced that it would buy back up to $300 million worth of stock. This represented about 10% of the company's market cap, which is no small amount. Nevertheless, the company managed to exhaust most of this buy back in just two months, as it recently announced that it has already worked through $250 million of the buyback.

As a result, another buyback announcement may be on the way: the company's current projections show that it will end 2010 with $900M in cash (even as it opens 400 new stores this year), which is more than the value of the company's capitalized operating leases, and more than a quarter of the company's market cap!

Contrast this with another stock favourite of ours, Manhattan Bridge Capital (LOAN), which announced a buyback of a paltry 3% of outstanding shares, and subsequently repurchased less than 0.06% of the company's outstanding shares in the ensuing six months. In contrast to GameStop, this company's actions suggest a willingness to talk up the stock price without returning cash to shareholders.

Of course, not all buybacks are positive for shareholders. If a stock is overvalued, the buybacks could turn out to be a waste, and would have been better doled out as dividends, as we saw with several companies last year.